Facing a boom and few options, Anna ISD turned to controversial bonds

Vernon Bryant/Staff Photographer“When the recession hit, we had the option of just letting the high school sit there half finished or selling the bonds it was going to take to complete that,” says Anna Superintendent Larry Johnson.

DallasNews.com, By EVA-MARIE AYALA, 06/15/13 – The rural Anna school district in Collin County had a trifecta of bad luck in 2009 that left officials with a half-built high school and few options to pay for its completion.

The aggressive growth that officials had projected stalled. Taxable property values dropped. And a state law capping school district tax rates hindered the district’s ability to sell new bonds.

“When you get to that point, and you’re stretched to the max … you have options, but none of them are good options,” Superintendent Larry Johnson said.

So the district turned to a controversial form of financing called capital appreciation bonds, or CABs. Because they don’t require periodic interest payments, as traditional current interest bonds do, they don’t count against the state tax rate cap until the payment is due. That could be decades later.

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Anna property taxpayers could have to pay back nearly five times the amount borrowed. But Johnson said the district plans to refinance the bonds as it can to get better interest rates, bring down the debt faster and reduce interest expense.

Anna isn’t the only district to resort to CABs, and is not the biggest user of them. But it serves as an example of why growing districts turn to CABs, particularly when faced with other challenges.

But the expense is why two legislators tried to restrict the use of capital appreciation bonds this session.

Rep. Dan Flynn, R-Van, said he wanted to increase transparency because many times school bond voters do not know they are approving programs that will include expensive forms of borrowing.

“When you find out what you have to pay back, then you kind of have a different attitude about it,” Flynn said.

The Anna school district sprawls over 63 square miles in a mostly farming area. It served only a few hundred students out of one campus for decades.

Then the boom hit. Collin County became one of the fastest-growing places in the nation, tripling in population since the 1990s.

Anna was in a peculiar position. The small town was north of the growth concentrated in places such as Frisco and McKinney but just close enough to Central Expressway to feel the ripple effects.

The Anna school district began spreading out from its campus off South Sherley Road, and eventually more space was needed.

In 2000, the district built its first stand-alone high school off North Powell Parkway. Then Bryant Elementary School was built in 2005, the year the district had 1,500 students and was struggling to keep up with a nearly 25 percent growth rate. Rattan Elementary School followed in 2007.

“All of a sudden, it took off. … They couldn’t manage or hold anything in the current facilities they had,” said Johnson, who came to the district later.

The high school was over capacity, with 10 portable buildings added.

At one point, the city was issuing about 500 new home permits a year, providing a steady increase of both students and tax revenue.

It’s difficult for a bedroom community with few businesses to raise money.

Housing makes up nearly 45 percent of the Anna school district’s taxable values, followed by acreage, farm and ranch land at about 42 percent. Only 6.7 percent is considered commercial and industrial. And for Anna, the largest taxpayer is a grocery store.

A state law requires school districts to prove at the time bonds are issued that they can repay them at a debt service tax rate no greater than 50 cents per $100 of assessed property value.

To pay for the new schools and renovations, Anna’s debt service tax rate rapidly climbed from nearly 13 cents in 2003 to the state’s 50-cent cap in 2008, where it has been ever since.

Then the economic slowdown hit.

By 2009, growth was flattening, with only about a half-dozen new home permits issued. Compounding troubles, taxable values of existing properties started to decline. The property tax base hit a high of $531.7 million in 2008-09 and then fell to $503.8 million in 2011-12.

That meant fewer dollars to meet facility needs for the students who already were there.

“Things just stopped. But they were already in the middle of everything at that point in time,” Johnson said. “When the recession hit, we had the option of just letting the high school sit there half finished or selling the bonds it was going to take to complete that.”

Capital appreciation bonds helped the district cover the cost of finishing the campus. With no installment payments, the bonds don’t count against a school district’s 50-cent debt limit until the payments are due at maturity.

Since 2009, the district has received about $9.5 million, including premiums, from issuing CABs. CABs have made up nearly 17 percent of the district’s building bonds.

If Anna kept to the original maturity schedule, it would have to repay nearly $52 million, about five times what was borrowed. Johnson noted that the bonds have features allowing them to be refinanced or paid off sooner than the original due dates, which range from 20 to 40 years from the date of issue.

Though Anna was at the 50-cent debt limit and could not have used current interest bonds in this case, CABs can end up costing school districts twice as much in interest.

Critics of capital appreciation bonds say school districts need to make better use of other options first.

“Why don’t they use portables until the tax base builds up enough to support them?” said Chuck DeVore, an outspoken critic of such bonds and a vice president at the Texas Public Policy Foundation. “There should be judicious use of portables and stretch out classroom size where you can.”

Johnson counters that that’s what his district did. And it was bulging out of the portables. In fact, one such portable building was needed to provide additional restrooms rather than classrooms because the campus was so over capacity.

And the district is trying to be creative in addressing growth to delay costs, Johnson said.

The high school was planned in phases so the district could add on to it as enrollment grows. The middle school moved into the previous high school building. The previous middle school space will be used as an early childhood center beginning next year to serve prekindergarten and kindergarten. That will free up space at the two elementary schools.

Johnson notes that the district still has voter approval to issue about $20 million more in bonds to help with needs, but officials have decided to allow growth to catch back up and to pay down some of the existing debt first to avoid an overreliance on CABs.

The uptick in growth again will help with revenue.

City Manager Philip Sanders said Anna is back up to about 330 new home permits a year, which will bring in about 1,000 new residents. In the last few months, two technology companies have opened in town and more businesses are expected to show interest as FM455 is widened from a two-lane country road to a four-lane and eventually six-lane boulevard.

Anna has nearly 10,000 residents now, many of them young families.

“You never know how that cycle plays out, but it is not unrealistic that we will hit 20,000 residents in the next 10 years,” Sanders said. “We have a lot of potential for growth here. People are interested in what Anna has to offer.”